Gnych v Polish Club Limited [2015] HCA 23

HIGH COURT OF AUSTRALIA

FRENCH CJ, KIEFEL, GAGELER, KEANE AND NETTLE JJ

JACEK GNYCH & ANOR APPELLANTS

AND

POLISH CLUB LIMITED RESPONDENT

Gnych v Polish Club Limited [2015] HCA 23 17 June 2015 S58/2015

ORDER

1. Appeal allowed with costs.

2. Set aside the orders of the Court of Appeal of the Supreme Court of New South Wales made on 17 October 2014 and orders 3, 4, 6 and 7 of the orders of that Court made on 16 September 2014 and, in their place, order that the appeal be dismissed with costs.

3. Remit the matter to the Supreme Court of New South Wales for determination of the assessment of damages, if any, pursuant to the undertakings listed in order 4 of the orders of the Court of Appeal of the Supreme Court of New South Wales made on 6 November 2014.

On appeal from the Supreme Court of New South Wales

Representation

G O'L Reynolds SC with G P Segal and M A Friedgut for the appellants (instructed by Drexler Litigation & Compensation Lawyers)

P R Clay SC with J M McKelvey and A Isaacs for the respondent (instructed by Strathfield Law)

Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Gnych v Polish Club Limited

Property – Leases – Section 92(1)(d) of Liquor Act 2007 (NSW) provides that licensee must not grant lease over certain parts of licensed premises without approval of Independent Liquor and Gaming Authority – Where lease granted in breach of s 92(1)(d) – Whether lease void and unenforceable.

Contracts – Statutory illegality – Where lease granted in contravention of s 92(1)(d) of Liquor Act 2007 (NSW) – Where Liquor Act imposes statutory penalty for breach – Whether lease void and unenforceable.

Liquor Act 2007 (NSW), s 92(1)(d). Retail Leases Act 1994 (NSW), ss 6A, 8(1), 16(1), 16(2).

FRENCH CJ, KIEFEL, KEANE AND NETTLE JJ. Section 92(1) of the Liquor Act 2007 (NSW) ("the Liquor Act") provides: "A licensee or a related corporation of the licensee must not: … (c) lease or sublease any part of the licensed premises on which liquor is ordinarily sold or supplied for consumption on the premises or on which approved gaming machines are ordinarily kept, used or operated, or (d) lease or sublease any other part of the licensed premises except with the approval of the Authority." The respondent ("the Club") leased part of its licensed premises to the appellants. Section 92(1)(c) of the Liquor Act did not apply in the circumstances because liquor was not sold or supplied on that part of the premises leased to the appellants, nor were gaming machines kept, used or operated on that part of the premises. But because the lease had not been approved by the Authority, there was a contravention of s 92(1)(d). The issue in this appeal is whether, as the Club contends, its contravention of s 92(1)(d) of the Liquor Act rendered the lease void and unenforceable. For the reasons that follow, the Club's contention should be rejected. Factual background The Club is a registered club under the Registered Clubs Act 1976 (NSW) and the holder of a club licence under the provisions of Div 3 of Pt 3 of the Liquor Act. The Club's licence pertains to a building of two floors with a rooftop cocktail hall ("the premises"). The ground floor comprises the entry to the premises and, relevantly, a storage area and staff toilets. The first floor contains male and female toilets, and a bar where liquor can be purchased. The first floor also contains a restaurant with a capacity of approximately 50 seats and an adjoining kitchen and office ("the restaurant area"). Adjoining the restaurant is an area referred to as the mirror hall ("the mirror hall") with a capacity of approximately 80 seats, which is accessed from the restaurant by way of a moveable wall. By letter to the Club dated 3 August 2011, the appellants offered to run a restaurant in the restaurant area and organise functions on the premises. The Club responded with a counter‑proposal in the form of a lengthy document, stipulating that the appellants were to be engaged as the exclusive contractors for catering services to the Club. In response, the appellants, by their solicitors, sent the Club a "term sheet" proposing the terms of a lease agreement with respect to the restaurant area and the downstairs storage area. The lease was proposed to be for two years with two two‑year options, at a rent of $500 per week payable monthly, beginning with an initial rent‑free period and five months payable at a reduced rate. The appellants proposed not to occupy the bar on the first floor but to operate their own cash register at the bar. Restaurant patrons could order drinks in the bar area and take them back to the tables, and the appellants were to be entitled to 10 per cent of those takings. The appellants also proposed to renovate the restaurant. On the term sheet, under the heading "Licence Agreement", it was stated that the appellants would have "use of [the] small hall area adjacent to the restaurant on Frid/Sat/Sun", referring to the mirror hall. The Club resolved to accept the terms proposed by the appellants, but it appears this resolution was not communicated to the appellants. Nevertheless, renovations commenced in December 2011 and were completed in March 2012. On 29 March 2012, the appellants' solicitors sent the Club a draft lease in registrable form together with a licence agreement for the mirror hall. On 31 March 2012, the appellants held a "grand opening" for the restaurant, and commenced regular trading. In May 2012, the Club engaged solicitors. Negotiations ensued about the terms of the lease, but no written agreement was ever finalised. The Retail Leases Act Section 3 of the Retail Leases Act 1994 (NSW) ("the Retail Leases Act") defines "retail shop lease" or "lease" to mean: "any agreement under which a person grants or agrees to grant to another person for value a right of occupation of premises for the purpose of the use of the premises as a retail shop: (a) whether or not the right is a right of exclusive occupation, and (b) whether the agreement is express or implied, and (c) whether the agreement is oral or in writing, or partly oral and partly in writing." A restaurant is within the s 3 definition of "retail shop". Section 8(1) of the Retail Leases Act provides that a retail shop lease is taken to have been entered into when a person enters into possession of a retail shop as lessee or begins to pay rent as lessee under the lease, whichever happens first. Section 16(1) of the Retail Leases Act provides that "[t]he term for which a retail shop lease is entered into ... must not be less than 5 years." Section 16(2) provides that the term of a retail lease will be extended by the amount of time necessary for compliance with s 16(1). Section 6A(1) of the Retail Leases Act provides relevantly that the Act does not apply to a lease of a retail shop for a term of less than six months. But s 6A(2) and (4) together provide that s 16(1) and (2) may apply to a lease where the lessee has been in possession of a retail shop without interruption for more than one year, and the lessee notifies the lessor in writing that the lessee elects to have the benefit of s 16. The appellants took advantage of these provisions. They entered into possession of the restaurant area on 31 March 2012. On 2 August 2013, the appellants gave the Club the notice required by s 6A(4). That notice was effective to fix the term of the lease by s 16 of the Retail Leases Act as five years from 31 March 2012. The dispute between the parties Although the restaurant operated successfully, relations between the appellants and the Club deteriorated. On 7 July 2013, the Club's solicitors sent the appellants' solicitors a letter outlining a number of grievances, stating the Club's decision to terminate the relationship, and requesting that the appellants vacate the premises. By reply letter, the appellants disputed the allegations made by the Club and sought a mediated meeting with the then President of the Club to try and resolve the issues between the parties. There was no response to this letter. On 2 August 2013, the Club's solicitors wrote to the appellants' solicitors, stating that s 92(1) of the Liquor Act overrides any rights the appellants may otherwise have under the Retail Leases Act, with the effect that the appellants had no lease over the restaurant area. On 5 August 2013, the Club excluded the appellants from the restaurant area. The proceedings in the Supreme Court of New South Wales The appellants commenced proceedings in the Equity Division of the Supreme Court of New South Wales, seeking a declaration that they have a leasehold interest in the restaurant area for a five‑year period commencing on 31 March 2012, pursuant to ss 8 and 16 of the Retail Leases Act. The primary judge (Ball J) noted that the restaurant area was a "retail shop" as defined in s 3 of the Retail Leases Act, and held that the appellants: "obtained a leasehold interest in the restaurant, kitchen, office, storeroom and toilet. It seems clear that they had exclusive possession of those areas; and that the intention of the parties was that their right of occupation amounted to a lease." The Club contended that the lease for five years, which came into existence upon the appellants' election to take the benefit of s 16 of the Retail Leases Act, was, and remained, in breach of the Liquor Act and was therefore void and unenforceable. The primary judge held that the lease was granted in breach of s 92(1)(d) of the Liquor Act because the restaurant area is "part of the licensed premises", but that the breach did not affect the appellants' leasehold interest. His Honour noted that the appellants' claim did not depend on any illegality: they were simply asserting that a lease arose from the conduct of the parties and by operation of s 16(1) of the Retail Leases Act. His Honour said that: "In those circumstances, there is no reason why [the appellants] should not be entitled to a declaration concerning the existence of a lease and an injunction restraining the club from interfering with their rights of exclusive possession". As to the mirror hall, the primary judge held that "there can be no suggestion that the rights [the appellants] had in relation to the [mirror hall] amounted to a lease" under the general law which might contravene s 92(1)(d) of the Liquor Act, and so no question of illegality arose with respect to that part of the premises. The appellants' licence to use that area on certain occasions was said to fall "within the definition of 'lease' under s 16 of the [Retail Leases Act]", so that the appellants had the benefit of the minimum five‑year term provided for in that section in respect of the mirror hall as well. The primary judge held that the appellants were not entitled to a declaration of a leasehold interest in the mirror hall, but that they were entitled to an order for specific performance of an agreement to license the area to them for five years commencing on 31 March 2012. The Court of Appeal The Court of Appeal of New South Wales (Meagher and Leeming JJA and Tobias AJA) allowed the Club's appeal. The Court of Appeal (Tobias AJA, with whom Meagher and Leeming JJA agreed) was disposed to accept that a "lease" for the purposes of the Retail Leases Act, which did not confer a right of exclusive possession on the lessee, "would not qualify as a lease under the general law" and so would not engage s 92(1)(d) of the Liquor Act. But because the appellants had conceded that "there was at least an implied agreement between the parties that the [appellants] would have exclusive possession of the restaurant area", it was held that a lease under the general law had been created. The Court of Appeal accepted that "the parties seem to have agreed the rent … [and] [b]y virtue of s 16(1) of the [Retail Leases Act] the term of the [appellants'] exclusive occupation was five years from 31 March 2012." The circumstance that the duration of the lease was dependent upon the operation of the Retail Leases Act did not prevent the conclusion that a lease had been granted so as to attract the operation of s 92(1)(d) of the Liquor Act. The Court of Appeal held that the purpose of s 92 of the Liquor Act is to ensure that licensees do not enter into arrangements with others whereby the regulation of the use of licensed premises under the Liquor Act might be compromised. It was said that the grant of exclusive possession to a person other than the licensee "cannot serve the purpose or policy of the statute and, in particular, the overarching responsibility of the licensee to personally supervise and manage the conduct of the business of the licensed premises." This view of the purpose and policy of the Liquor Act required the conclusion that any lease caught by s 92(1)(d) is not to be enforced by the courts. The Court of Appeal set aside the orders of the primary judge with respect to the restaurant area. As to the mirror hall, the Court of Appeal set aside the declaration and order on the basis that, absent an enforceable lease of the restaurant area, there was no utility in maintaining the primary judge's orders in that regard. The appeal to this Court On 13 March 2015, Hayne and Nettle JJ granted the appellants special leave to appeal to this Court. The parties' arguments in this Court One argument advanced by the appellants in their written submissions, but not pressed in oral argument, was that the Court of Appeal erred in concluding that they had a lease under the general law. It was argued that the lease was created by the Retail Leases Act by virtue of the parties' conduct and the operation of ss 8 and 16, and that s 92(1)(d) of the Liquor Act did not apply to a lease created by statute. The Club took issue with this argument, contending that the Retail Leases Act merely regulated the terms of a lease created by agreement between the parties. The Club argued that the mere fact that a statutory provision has the effect of implying terms into an agreement for a lease does not create a new lease pursuant to statute. In oral argument, counsel for the appellants was content to accept that there was a breach of s 92(1)(d) of the Liquor Act and to focus upon the contention that the Court of Appeal misunderstood the effect of that provision. It may therefore be accepted that the Court of Appeal was right to hold that, even though there was no concluded agreement between the parties as to the duration of the appellants' occupation of the restaurant area, a lease under the general law was created by the Club's admitting them into possession of that area on the terms contained in the term sheet. By virtue of s 127 of the Conveyancing Act 1919 (NSW), the lease was initially terminable by either party by one month's notice in writing, expiring at any time. On 31 March 2013, when the appellants had been in possession of the restaurant area without interruption for one year, s 6A(2) and (4) of the Retail Leases Act made available to the appellants the right to elect to have the benefit of s 16 of that Act. On 2 August 2013, the appellants gave notice of that election, by virtue of which the duration of the lease was fixed at a total period of five years. The principal argument advanced by the appellants in this Court was that the contravention of s 92(1)(d) of the Liquor Act was the failure of the Club to have a lease approved by the Authority before allowing the appellants into possession of part of the licensed premises. It was argued that to hold the lease agreement to be void and unenforceable would prejudice the appellants without furthering the objects of the Liquor Act. The Club advanced no good answer to this argument. Illegality: general principles In Equuscorp Pty Ltd v Haxton, French CJ, Crennan and Kiefel JJ explained that an agreement may be unenforceable for statutory illegality in three categories of case, where: "(i) the making of the agreement or the doing of an act essential to its formation is expressly prohibited absolutely or conditionally by the statute; (ii) the making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute; (iii) the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a 'contract associated with or in the furtherance of illegal purposes'. In the third category of case, the court acts to uphold the policy of the law, which may make the agreement unenforceable. That policy does not impose the sanction of unenforceability on every agreement associated with or made in furtherance of illegal purposes. The court must discern from the scope and purpose of the relevant statute 'whether the legislative purpose will be fulfilled without regarding the contract or the trust as void and unenforceable'." (footnotes omitted) There was some vacillation on the part of the appellants as to whether their argument included an invitation to the Court to deal with the present case as a case in the first or third category. In the end, little turns on this point because the consequence of illegality is a matter of statutory construction whatever category of illegality is involved. In this regard, in Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd, Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ cited with approval the observation by Mason J in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd that: "the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contract, a question of statutory construction". Their Honours went on to state that whether a statute which: "contains a unilateral prohibition on entry into a contract … is void … depends upon the mischief which the statute is designed to prevent, its language, scope and purpose, the consequences for the innocent party, and any other relevant considerations. Ultimately, the question is one of statutory construction." That statement was, in turn, cited with approval by Gummow ACJ, Kirby, Hayne, Crennan and Kiefel JJ in Master Education Services Pty Ltd v Ketchell. Accordingly, the scope of the prohibition in s 92(1)(d) of the Liquor Act and the consequences of a contravention of the prohibition are to be determined by the language of s 92(1)(d) of the Liquor Act construed in the context of the Liquor Act as a whole. The scope of the prohibition in s 92(1)(d) of the Liquor Act The scope of the prohibition in s 92(1)(d) of the Liquor Act can be understood only by reference to the legal characteristics of a lease. In Progressive Mailing House Pty Ltd v Tabali Pty Ltd, Deane J described a lease as possessing a "duality of character … [being] both an executory contract and an executed demise." In this conception, a lease is a "[bundle] of rights and duties which together can be identified as [a] species of property" the origins of which lie in the contract between lessor and lessee. In terms of the dual character of a lease described by Deane J, s 92(1)(d) is not directed at the bundle of rights and duties under the contract between lessor and lessee; rather, it is directed squarely at the conduct of the licensee/lessor in executing a demise of part of licensed premises. In Chelsea Investments Pty Ltd v Federal Commissioner of Taxation, Windeyer J said: "A lease strictly means a species of conveyance, the grant of a right to the exclusive possession of land for a term less than that which the grantor has. But by a usage that is apparently metonymical in origin the word 'lease' can describe not only the grant but that which is granted, namely the term." Section 92(1)(d) is concerned with the act of the licensee: it proscribes the grant by the licensee rather than that which is granted. It does not, in terms, proscribe the performance by the parties of their obligations under the relationship created by the grant. The Club, in pressing for a more expansive view of the scope of the proscription in s 92(1)(d), in which the rights of the parties to the lease are sterilised, did not shrink from the unattractive result that, on this view, contractual arrangements freely entered into by a licensee would be automatically sterilised, at the licensee's instigation, by the licensee's reliance on its own breach of the statute to the detriment of the lessee. As a matter of legislative construction, the likelihood of adverse consequences for the "innocent party" to a bargain has been recognised as a consideration which tends against the attribution of an intention to avoid the bargain to the legislature. That consideration is consistent with the general disinclination on the part of the courts to allow a party to a contract to take advantage of its own wrongdoing. There may be cases where the legislation which creates the illegality is sufficiently clear as to overcome that disinclination; but it is hardly surprising that the courts are not astute to ascribe such an intention to the legislature where it is not made manifest by the statutory language. And in the present case, this unattractive aspect of the Club's argument is compounded by the circumstance that, as its counsel acknowledged, the Club was obliged to take steps to seek the approval of the Authority for the grant of the lease and did not do so. The breach of s 92(1)(d) on which the Club sought to rely was a breach by the Club which gave rise to an offence that was complete at the moment when the Club allowed the appellants into exclusive possession. The subsequent observance by both parties of the terms of the lease was not prohibited and did not give rise to any continuing offence. This understanding of the limited scope of the prohibition in s 92(1)(d) is confirmed by a consideration of the consequences of a breach of the provision. Consequences of a breach of s 92(1)(d) of the Liquor Act It is not the case that the only way in which legal effect can be given to s 92(1)(d) is by the sterilisation of leases granted in contravention of the prohibition. Section 92(1) imposes a penalty upon breach. In Yango, Mason J said: "There is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished". This observation was cited with approval by Brennan CJ, Dawson and Toohey JJ in Byrne v Australian Airlines Ltd in the course of their Honours' expression of support for the proposition that a statute which prohibits the doing of an act under a penalty does not necessarily sterilise a legal relationship associated with that act. In this case, the imposition of a penalty upon the Club by reason of its grant is not the only consequence of the Club's contravention of s 92(1)(d). The crucial step in the reasoning of the Court of Appeal in relation to the consequence of the Club's breach of s 92(1)(d) was explained in the following passage: "Notwithstanding that a breach of s 92(1)(d) gives rise to an offence on the part of the licensee (in this case the Club) and notwithstanding that the prohibition contained in that provision can be overcome by the obtaining of approval from the Authority, nevertheless … any sanction short of the prohibited lease being rendered unenforceable and void would frustrate the implementation of the legislative purpose inherent in the statutory prohibition. In this respect it is noteworthy that the prohibition only applies to a lease or sublease which, by definition as it were, entitles the lessee or sublessee to exclusive possession and, therefore, the right to exclude the licensee (or its manager) from the leased or subleased premises. That cannot serve the purpose or policy of the statute and, in particular, the overarching responsibility of the licensee to personally supervise and manage the conduct of the business of the licensed premises." The Court of Appeal erred in its conclusion that the policy or purposes of the Act could not be served by any sanction short of holding the lease void. There are two separate but related flaws in the analysis reflected in the passage cited. First, s 92(1)(d) expressly postulates a lease of part of a licensed premises. Given that the right of exclusive possession is the hallmark of a lease, s 92(1)(d) necessarily contemplates the vesting of exclusive possession of part of a licensed premises in a person other than the licensee. Accordingly, the vesting of exclusive possession of part of licensed premises in a person other than a licensee cannot be said to be contrary to the purpose and policy of the statute: the statute contemplates that precisely that state of affairs may be brought about by a grant by the licensee. True it is that a grant may lawfully be made only with the approval of the Authority, but the circumstance that s 92(1)(d) acknowledges that a person other than the licensee may enjoy exclusive possession is inconsistent with the Court of Appeal's understanding of the purpose and policy of the Act in this respect. The second flaw in this aspect of the reasoning of the Court of Appeal lies in the failure to recognise the important role assigned by the Liquor Act to the Authority in relation to the supervision and management of licensed premises. That role is inconsistent with the view that the regime established by the Liquor Act for the control of licensed premises requires that a contravention by a licensee of s 92(1)(d) automatically renders the lease which is granted void and unenforceable. Under s 139 of the Liquor Act, a complaint to the Authority may be made against a licensee by, among others, the Secretary of the Department, on the ground that the licensee has failed to comply with a requirement of the Act in relation to the licence or the licensed premises. Under s 141(2), the Authority, if satisfied that the ground is made out, may cancel or suspend the licence. It may also decide to take no action in relation to the licence. A contravention of s 92(1)(d) of the Act thus gives rise to the possibility that the liquor licence might be cancelled, but cancellation is not automatic. Whether or not the licence should be cancelled is a matter for the Authority. The discharge by the Authority of its responsibility might lead to a decision that there should be no change in the status quo in relation to the licence. In that event, the appellants as lessees might continue their occupation of the leased part of the premises. If the Authority were to cancel the Club's licence, then a question would arise as to whether the lease was terminated by frustration or terminable by the appellants by reason of the Club's inability to make licensed premises available under the lease. On the other hand, the Authority might conclude that the appellants were fit and proper persons to be in charge of the part of the premises dedicated to the restaurant, which might lead it to decide not to cancel the Club's licence notwithstanding its breach of s 92(1)(d), in which case the Club's breach of the Liquor Act would have no consequences for the continuation of the lease. The conclusion that a breach of s 92(1)(d) automatically avoids the lease would pre‑empt the effect of the Authority's decision in this regard. That outcome would not be consistent with the supervisory role entrusted to the Authority by the Liquor Act. Finally, it is distinctly possible that, in a case where the Authority has granted its approval to a lease of part of the licensed premises, the lessee may later cause the licensee to fail to observe the requirements of the Liquor Act relating to the licence or the licensed premises. It may be accepted that such a lessee should not have the power to exclude the licensee from the leased part of the licensed premises. The Act does not provide that the lease shall be void and unenforceable in those circumstances. It deals with that possibility by arming the Authority with the regulatory powers already referred to. Accepting that the policy of the section is to guard against the possibility that a lessee may exclude the licensee from the leased part of the licensed premises in such circumstances, there is no more reason to suppose that the Act necessitates avoidance of a lease entered into without approval than that it necessitates avoidance of a lease entered into with approval. Conclusion The offence created by s 92(1)(d) was committed by the Club when the Club granted the appellants possession of the restaurant area. That offence was committed at that time, once and for all, because the approval of the Authority to the lease had not then been obtained. The continuation of the lease was not a continuing offence. One consequence of the contravention was that the Club was liable to a fine; but that was not the only consequence. The Club's breach of the Act also meant that the Authority was empowered to cancel the Club's licence should it decide to do so. It might do so, but it might not. Whether the licence should be cancelled is a matter for the Authority. The Authority might decide that the licence should be permitted to stand if it does not regard the current arrangements between the parties as unacceptable insofar as the public interest in the due observance of the standards required by the Liquor Act is concerned. If the Authority were to make such a determination, there would be no reason connected with the licence why the lease should not continue. Orders The appeal should be allowed. The following orders should be made: 1. Appeal allowed with costs. 2. Set aside the orders of the Court of Appeal of the Supreme Court of New South Wales made on 17 October 2014 and orders 3, 4, 6 and 7 of the orders of that Court made on 16 September 2014 and, in their place, order that the appeal be dismissed with costs. 3. Remit the matter to the Supreme Court of New South Wales for determination of the assessment of damages, if any, pursuant to the undertakings listed in order 4 of the orders of the Court of Appeal of the Supreme Court of New South Wales made on 6 November 2014.